Question 1

A mutual fund is engaged in the short term and temporary purchase of index futures, for purposes of minimizing its cash exposures. Which ʺuseʺ most closely explains their actions?

Accepted Answer

A)  Risk management 
B)  Speculation 
C)  Reduced transaction costs 
D)  Regulatory arbitrage

Question 2

What phrase might be used to describe the final transaction a short seller conducts when shorting an equity security?

Accepted Answer

A)  Buy 
B)  Sell 
C)  Borrow 
D)  Covering

Question 3

Assume that an investor lends 100 shares of Jiffy, Inc. common stock to a short seller. The bid-ask prices are $32.00 - $32.50. When the position is closed the bid-ask prices are $32.50 - $33.00. The commission rate is 0.5%. The market interest rate is 5.0% and the short rebate rate is 3.0%. Calculate the gain or loss to the lender. Assume the lender is not subject to a bid-ask loss or commissions.

Accepted Answer

A)  $164.00 gain 
B)  $164.00 loss 
C)  $100.00 gain 
D)  $100.00 loss

Question 4

Select the family member who is offering the most diversification to the rest of the family.

Accepted Answer

A)  Dad works for General Motors 
B)  Mom works for Goodyear 
C)  Daughter works for Jiffy Lube 
D)  Son works for Eli Lilly & Company

Exam 1: Introduction to Derivatives

A mutual fund is engaged in the short term and temporary purchase of index futures, for purposes of minimizing its cash exposures. Which ʺuseʺ most closely explains their actions?

What phrase might be used to describe the final transaction a short seller conducts when shorting an equity security?

Select the family member who is offering the most diversification to the rest of the family.